What does Standard Deviation primarily measure?

What does Standard Deviation primarily measure?

• A. Mean return
• B. Volatility of returns
• C. Correlation with the market
• D. Liquidity risk

Answer: (B)

Standard deviation measures how much returns vary around their average. In investing, that variability is what we call volatility. A higher standard deviation means returns swing more from period to period, signaling greater risk, while a lower standard deviation indicates more predictable performance. This focus on dispersion around the mean distinguishes it from the average return itself, which is the mean. It also isn’t about how correlated a return is with the market (that’s about beta or correlation) or about how easily you can buy or sell an asset (liquidity). So the primary idea captured by standard deviation is the volatility or variability of returns.

Standard deviation measures how much returns vary around their average. In investing, that variability is what we call volatility. A higher standard deviation means returns swing more from period to period, signaling greater risk, while a lower standard deviation indicates more predictable performance. This focus on dispersion around the mean distinguishes it from the average return itself, which is the mean. It also isn’t about how correlated a return is with the market (that’s about beta or correlation) or about how easily you can buy or sell an asset (liquidity). So the primary idea captured by standard deviation is the volatility or variability of returns.